Re-examining the impact of oil prices on stock returns in the presence of time-varying volatility

Patrick Herb () and Farooq Malik ()
Additional contact information
Patrick Herb: Northern Arizona University
Farooq Malik: Northern Arizona University

Journal of Economics and Finance, 2023, vol. 47, issue 4, No 1, 815-843

Abstract: Abstract Through Monte Carlo simulations, we explore the size, power and probability of making a type II error for a linear model with an exogenous regressor and ARCH or GARCH volatility. We estimate and compare the results for OLS with OLS standard errors, OLS with White’s standard errors, and maximum-likelihood estimation (MLE). We find that for small samples, all estimation methods have higher frequencies of type II errors and lower power than the nominal test size suggests. In addition, we find that White’s standard errors are an improvement over OLS, but the improvement is much smaller than one might expect, especially when compared to MLE. Increasing the sample size decreases the frequency of type II errors for all methods, but the rate of convergence to the nominal test size is much faster for MLE than the other two methods. Using empirical data from Jan 1986 to November 2021, we show that researchers are more likely to find a statistically significant impact of changes in oil prices on U.S. stock returns if they account for time-varying volatility. Our results have important practical implications and will help in resolving previous inconsistencies in the literature.

Keywords: Time-varying volatility; Oil prices; Stock returns (search for similar items in EconPapers)
JEL-codes: C10 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s12197-023-09638-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jecfin:v:47:y:2023:i:4:d:10.1007_s12197-023-09638-7

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/12197/PS2

DOI: 10.1007/s12197-023-09638-7

Access Statistics for this article

Journal of Economics and Finance is currently edited by James Payne

More articles in Journal of Economics and Finance from Springer, Academy of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().